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Kass: Global Government Dysfunction

Oct 01, 2013 | 06:00 AM EDT

Back to the Markets

The developing global government dysfunction and the emerging deterioration in fundamentals are now being followed by technical weakness.

Flattening breath and other signs of distribution in equities since May have been coupled with a directional change (from down to up) in bond yields. Certain measures of momentum such as
NYSE stocks over their 200-day moving averages and the McClellan Summation Index are not confirming new highs in the averages. Meanwhile, as a contrary indicator, retail investors have become net equity buyers to the largest degree since 2007, and speculation in small-caps (namely, the
Russell 2000) and in the anointed stocks on the
Nasdaq has grown more conspicuous.

Other indicators that point toward cautiousness are the buoyant new-issue market and an all-time high in margin debt. At the same time, financial stocks -- as it is written in the Investment Bible, the sector "shows the way" -- have continued to perform relatively poorly, which is another foreboding signal.

The above technical considerations are clearly late-cycle warnings if not an indicator of a market top.

Finally, I would note that September, a seasonally weak period, was an unanticipated good month for most markets in 2013. Wouldn't it be fitting if the performance over the balance of the year was disappointing (in contrast to the strength typically witnessed at the end of the fourth quarter)?

Market Outlook

Political, fundamental and technical factors are deteriorating, conspiring to put continued pressure on the U.S. stock market in recent days.

Regardless of the direction of the market over the next few days, I continue to believe that the U.S. stock market offers an unattractive reward vs. risk and that the top I
forecast in early August is still in place.